Moving to Canada? Plan your taxes!

Canada, here we come! Oh wait, what do you mean income taxes?

Canada immigration website appeared to crash several times last night as Trump’s victory became more apparent. With the victory, you or someone you know may seriously be considering the move to Canada. Assuming, you are moving to Canada, you have convinced your family to move, have found a job and figured out the logistics, how easy is it to make the move, from a purely taxation point of view?

First to start, US taxation system is based on citizenship vs Canada, which is on residency. Therefore, if you are a Canadian citizen living somewhere else in the world and have established residential ties to another country, then you generally do not have to file a Canadian tax return and pay Canadian taxes. Contrast this with the US, who says if you are a US citizen, green card holder or meet the permanency test, you will likely have to file US Federal and state tax returns.

Furthermore in addition to filing the tax returns, you may also have to file compliance forms and report foreign property held anywhere outside of the US. The filing requirements can be rigorous but more so, failure to comply with the reporting requirements can cause substantial penalties. It is important to remember that even though you may not owe any tax, you are generally still required to file a US tax return and file the related compliance forms.

Let’s back track and see what happens in the year that you establish Canadian tax residency. The date you become a tax resident of Canada (say November 9, 2016), you are subject to Canadian tax on your worldwide income. Prior to this date, you do not have to include the income earned in your Canadian tax return for the short year you are a resident of Canada. This is a great tax planning point if you are considering a move. Someone coming from a lower tax jurisdiction could be hit with a large tax bill given that Canadian tax rates are generally higher than many countries in the world. You should consider what portfolio you have and whether it makes sense to dispose of certain securities, investments property etc before you move to Canada. There are also some tax sheltered programs in Canada (TFSA) which the USA does not recognize as being tax sheltered – hence this makes tax planning complicated.

When you become a tax resident of Canada, you are generally deemed to dispose of and reacquire all your property held in the US at fair market value on the date of move. This does not trigger any taxes at the time of the move. However, it establishes a new cost base for your property. It is important to keep a record of the fair market value of your marketable securities and property on the day that you become a tax resident so that you are able to provide the evidence to the CRA, should they ask.

So, now say that you decide to leave Canada after Trump ends his 4 year term. What happens? Well, generally, any appreciations you have had in your property over the time you were a resident of Canada now becomes taxable. Also, any property you have acquired in Canada, you dispose of at the market value on date of move. There are some exceptions to this rule if you were a resident for less than 60 months in the last 10 years. There may be significant opportunities as well as pitfalls associated with these tax rules. However, these rules are very complicated and you need to ensure you speak to someone who specializes in cross-border taxation.

One common point that is overlooked by many is that your status for tax purposes can be very different from your status for immigration purposes and the two may not necessarily be the same. Hence, if you know someone who is considering a move, it is vital to know that taxation is a pivotal part of the decision.

To our fellow Americans, we welcome you with open arms, but hope you are ready to contribute to our great economy and pay your fair share of taxes. We were appalled with Trump’s comment that not paying taxes was “smart” and we hope you feel the same way. Welcome to Canada, eh!

This article is for information purposes only. Tax rules regarding cross border taxation can get complicated and hence we highly recommended you speak to a professional to discuss your particular situation.

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2 Comments

hi, I am moving to canada. I have property in New Jersey. Should I sell it now before I migrate to Canada so I don’t have to pay tax on it in Canada or sell it later when I become permanent resident of Canada? benifit of selling later is property price might go up

Hi Duminda.
The answer is, it depends. You have to consider all factors, including appreciation of property, what other properties you have? Is the property in the U.S. your principal residence? Are you going to be renting it out when you move to Canada? Our office works with US CPAs to help ease the transition for you. Once you know the details, perhaps give our office a call!